Transcript The Australian Energy Regulation

The Australian Energy
Regulator
Today’s agenda

Presentations from:
◦ AER – Sebastian Roberts, General Manager Networks
◦ Consumer challenge panel – Robyn Robinson & David
Prins
◦ Jemena Gas Networks (JGN) – Rob McMillian

Time for questions at the end of presentations

Close at 4.30pm
The Australian Energy
Regulator
:
About our draft decision

Our draft decision reflects changes to the
National Gas Law and Rules in 2012

It draws on guidelines from our Better
Regulation program

CCP advice throughout JGN review

Stakeholder consultation process
Total revenue
JGN's past total revenue, proposed total revenue and AER draft
decision revenue allowance ($million, 2014–15)
Total revenue: Differences between
proposal and draft decision
AER’s draft decision annual average revenue (smoothed) compared with the
2014–15 building block revenue (smoothed) ($million, 2014–15)
Indicative impact on bills

Gas distribution charges represent approximately 50 per
cent of a customer's annual gas bill.

There is considerable uncertainty about wholesale gas
prices in the near future.

All else constant we estimate our draft decision would
reduce the annual gas bill:
◦ for residential customers by $112 ($nominal) in 2015–16, which is an
11 per cent reduction.
◦ for small business customers by $539 ($nominal) in 2015–16, which is
an 11 per cent reduction.
Rate of return
%
Nominal risk free rate (cost of equity)
2010–15
AER decision
2015–18
JGN’s proposal
2015–18
AER draft decision
5.85%
4.12%
3.55%
Equity risk premium
5.2%
6.59%
4.55%
MRP
6.5%
N/A
6.5%
0.8
N/A(d)
0.7
Gearing ratio
60.0%
60.0%
60.0%
Inflation forecast
2.60%
2.55%
2.55%
Nominal post–tax return on equity
11.05%
10.71%
8.1%
Nominal pre–tax return on debt
10.02%
7.30%
5.93%
Nominal vanilla WACC
10.43%
8.67%
6.80%
Equity beta
Capital expenditure
AER draft decision compared to JGN’s past and proposed capex
($million, $2014-15)
300
Capex ($million, 2014-15)
250
200
150
100
50
0
JGN actual net capex
JGN forecast net capex
JGN estimated net capex
AER draft decision
Approved forecast net capex
Capital expenditure

JGN proposed capital expenditure of $1,130.4 million
($2014-15).

Our draft decision: $918.6 million ($2014-15), 18% lower
than proposal

The principal drivers for capex :
◦
◦
◦
◦
unit costs of new connections (40% of capex cuts)
facilities renewal projects (12% of cuts)
meter replacement rate (17% of cuts)
direct capex overheads (17% of cuts)
Operating expenditure
AER draft decision compared to JGN’s past and proposed opex
($million, $2014-15)
Operating expenditure (cont)

JGN proposed an operating expenditure of $789.3 million
($2014-15).

Our draft decision provides a substitute operating
expenditure of $779.7 million ($2014-15).

The principal drivers for our substitute opex are:
◦ Lower growth in input prices
◦ No increase in opex for regulatory reporting
Demand forecasts

We have adopted higher forecast than JGN

This results in an increase in annual per customer
consumption of:
◦ 8 per cent for residential
◦ 6 per cent for small business customers, and
◦ around 17 per cent for commercial customers

Leads to a decrease in JGN’s tariffs by around 8 per cent
Non-price terms and conditions of
access

The Reference Service Agreement sets out JGN’s terms and
conditions for access to its network

It is a starting point for users of the network to engage
with JGN and create their own contracts

We have proposed a number of revisions to JGN’s reference
Service Agreement, relating to:
◦ Requiring JGN to more appropriately allocate risk
◦ Clarifying how certain terms will operate
◦ ensuring that the RSA does not seek to pre-determine matters in which
JGN has discretion under energy laws
Next steps

Revised proposals from JGN on 27
February 2015

Stakeholder submissions 27 March 2015

Final decision May 2015